Is 2021 the year open banking delivers on its promise?
By Brian Coburn, CEO, Bridge
December 18, 2020
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By Brian Coburn, CEO, Bridge
December 18, 2020
If we’ve learned anything from 2020, apart from how to bake the perfect sourdough loaf, it’s how to do things differently. Not many of us are where we thought we’d be at the beginning of this tumultuous year. Targets have been thrown out of the windows and KPIs ripped up like yesterday’s chip paper.
Shopping habits changed almost overnight. Merchants stopped being able to take customer behaviour for granted and felt the pressure of competition. According to McKinsey, in the first six months of the year, consumers spent $347bn online with US retailers, up 30 percent from the same period in 2019. In the UK this year, shoppers upped their spending on FMCG goods by £678m in July alone, and online sales accounted for 97 percent of this growth. Geographical and age-related differences reduced as many older demographics turned to online shopping. This year’s changes have been both radical and stressful – to say the least – putting more pressure than ever on securing every revenue opportunity.
Open banking has potential to transform the rules of finance and financial transactions. It takes the power away from the banks and gives both merchants and consumers greater opportunity for choice. In doing so, it also threatens the payment oligopoly of major card providers. A report from PwC predicts that £7.2bn of revenue opportunity will be created by open banking within two years, with 71 percent of SMEs and 64 percent of adults anticipated to adopt it for e-payment transactions by 2022.
These new ways to pay, such as buy-now-pay-later apps, Google Pay and order-ahead apps have seen mass adoption, and consumers are shopping around to find payment methods and deals that suit them best. Merchants are under pressure to cater to the payment preferences of their local market because more than one-third of consumers will abandon a transaction if their preferred method of payment isn’t available. The simple reality is that merchants shut themselves off from certain markets if the consumer has no way to pay.
Offering payment choice is important, but another key advantage of open banking for merchants is the lower cost of sale. Open banking avoids card-related network fees and reduces fraudulent transactions, which means less revenue is spent on transaction-related fees and reimbursements. Merchants can turn this into benefits for their customers through discounts and loyalty rewards, and apply better access to insight data to delivering a more personalised shopping experience.
All of these changes have presented a huge opportunity for the ubiquity of open banking – much-hyped but still under-utilised – as consumers seek new ways to pay conveniently and securely.
Open Banking may also create new opportunities that encourage merchants to stop seeing payment types as point-to-point silos and a ‘no go’ area for innovation. For example, if an open banking payment fails it could be that the consumer has insufficient funds for the transaction, which the merchant could use as a prompt to offer a tailored buy-now-pay-later option to secure the sale. It’s a win-win situation, with the merchant securing the revenue and the customer receiving a highly personalised experience that fosters future loyalty.
Of course, this level of agility and innovation requires greater insight and tighter control over the payment system. The exchange of data has to take place securely and in a well-structured way via application programming interfaces (APIs). While extended choice for consumers is exciting, it can feel like added complexity for merchants, who have multiple payment providers to deal with. Yet that too can be easily overcome.
Just as open banking is opening up financial services, payment orchestration opens payment systems up to embrace change and opportunity. A single integration layer creates unified control over multiple payment channels, and makes introduction of new, disruptive payment services much easier, quicker and less costly.
Furthermore, intelligent routing means merchants are able to manage payments based on their chosen business rules. This allows them to add or remove payment providers without costly or complex integration work. It allows for experimentation with new offers and structured payment plans, as permanent additions to the retail proposition, or as limited term and flash offers.
Because of the opportunity it presents, and enabling technologies such as payment orchestration now making it easier to adopt, we believe that 2021 is the year that companies can finally embrace the open banking opportunity. It will liberate merchants from constrictive e-payment alliances and enable them to do things differently at the financial end of the transaction.
Although the concept of open banking has been active for a few years, the present acceptance of change is creating an environment in which it can thrive. Coupled with the addition of payment orchestration to a merchant's toolset, this could well be the catalyst for the widespread open banking services adoption we hope to see in 2021 and beyond.
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